Question

In: Finance

Jane and John Boilermaker wish to purchase a 40 acre tract of land valued at $1,900...

  1. Jane and John Boilermaker wish to purchase a 40 acre tract of land valued at $1,900 per acre. The lender charges a $500 loan application fee and $250 for a real estate appraisal. Fees totaling 1% of the loan amount are also required to complete the loan. The fees can be added to the original loan amount. The lender requires $24,000 initial equity for this loan. The contractual interest rate is 7%. The fixed annual payments are based on a 25 year amortization period. The interest is calculated using the remaining balance method.

  1. What is the effective annual interest rate for the loan?

  1. What is the effective annual interest rate of the loan if semiannual payments are made? Explain the difference from answer a.
  1. Assume the lender has given John and Jane the option of reducing (buying down) the contractual rate from 7.0% to 6.8% by paying a fee of 1% of the loan amount. This amount can be added to the loan. If John and Jane have a 10 year planning horizon and a 10% cost of capital, should they buy down the interest rate? (Note: disregard potential changes in income taxes.)

Solutions

Expert Solution

Buying down interest rate is not viable as it is not outweigh the first plan.

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

2. Irene and Frank Adam plan to purchase an 80 acre tract of land valued at...
2. Irene and Frank Adam plan to purchase an 80 acre tract of land valued at $2,200 per acre. The lender charges a $500 loan application fee and $250 for a real estate appraisal. A stock requirement of 5% of the loan amount (after addition of fees) is required. The fees and stock requirement can be added to the original loan amount. The original stock value will be returned upon retiring the loan. The contractual rate is 8%. The fixed...
2. Irene and Frank Adam plan to purchase an 80 acre tract of land valued at...
2. Irene and Frank Adam plan to purchase an 80 acre tract of land valued at $2,200 per acre. The lender charges a $500 loan application fee and $250 for a real estate appraisal. A stock requirement of 5% of the loan amount (after addition of fees) is required. The fees and stock requirement can be added to the original loan amount. The original stock value will be returned upon retiring the loan. The contractual rate is 8%. The fixed...
7. John and Mary Landlord want to purchase 200 acres of farm land valued at $2,000...
7. John and Mary Landlord want to purchase 200 acres of farm land valued at $2,000 per acre. Their lender requires a 20% down payment. Assume twenty annual payments. The interest rate is 7.0%. [USPV.07,20=10.5940] a. Calculate the schedule of interest and principal payment over the life of the loan using the constant payment method and the constant payment on principal method. Show your answer using a table. If you choose to use an excel spreadsheet then you need to...
On February 12,2021,Harvest Incorporated purchased the right to remove timber from a 13,000-acre tract of land...
On February 12,2021,Harvest Incorporated purchased the right to remove timber from a 13,000-acre tract of land over the next four years,and the company estimates no residual value.The timber is to be sold as lumber for new homeonstruction. The cost of the timber rights was$312,000,with estimated salable timber feet of 780,000.During 2021 and 2022,Harvest harvested and sold.600,000 feet of timber.What is the book value of the timber rights at the end of 2022,assuming the company uses the units-of- production method?
You have decided to purchase a small tract of land for building a new home on...
You have decided to purchase a small tract of land for building a new home on the outskirts of town. You have some money available but need a loan of $18,000 to make the purchase. The land will be owner-financed over 4 years with end-of-year payments. The interest rate is 9%. For each of the payback methods given, determine the present worth of the loan payments made by the borrower, using TVOM rates of 5%, 9%, and 13% Method 1:...
You can purchase a tract of land for $75,000 that you believe you can develop and...
You can purchase a tract of land for $75,000 that you believe you can develop and sell as a residential development. Your development costs are $60,000 to be incurred immediately. You expect to sell all the lots in years 3-5 at a net income of $70,000, $85,000, and $68,000 respectively. Your required rate of return is 12 percent. Do you purchase the tract of land?
Your friends and you decide to purchase a large tract of forest land in northern Minnesota...
Your friends and you decide to purchase a large tract of forest land in northern Minnesota with the intent of generating income from timber and leasing the hunting rights. Your estimated costs and returns are as follows: • $1400/acre purchase price of land, paid back in equal yearly installments over 15 years @ 7% annual interest. • $200/acre site preparation costs incurred immediately. • $250/acre tree planting costs incurred 1 year after purchase. • $100/acre forest management costs incurred 3,...
Suzy Bartles enters into an oral contract to purchase a tract of land from Bill Hermes....
Suzy Bartles enters into an oral contract to purchase a tract of land from Bill Hermes. The land is considered worthless, but the Bartles feels that she has discovered a possible usage that would drastically increase the value of the land. To assure herself of the potential value of the land, Bartles orally hires an attomey to investigate the title and records associated with the land in question. Before gaining any information from her attorney, Bartles orally contracts with the...
Purchase of a new home John and Jane had planned to save $60 000 dollars over...
Purchase of a new home John and Jane had planned to save $60 000 dollars over the next five years as a down payment on a house. Jane assured John that if they contributed $1000 each month to a savings account that pays an annual rate of interest of 2.5% compounded monthly that they would have enough money to put a down payment of $60 000 on their new house. Wanting their daughter to have a house, Jane’s parents (The...
Purchase of a new home John and Jane had planned to save $60 000 dollars over...
Purchase of a new home John and Jane had planned to save $60 000 dollars over the next five years as a down payment on a house. Jane assured John that if they contributed $1000 each month to a savings account that pays an annual rate of interest of 2.5% compounded monthly that they would have enough money to put a down payment of $60 000 on their new house. Wanting their daughter to have a house, Jane’s parents (The...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT